Changes to VAT Capital Goods Scheme

The government has confirmed previously announced changes to the Capital Goods Scheme (CGS), removing computer equipment from the requirements and raising the threshold for property expenditure to £600,000 from the end of July. This should avoid the need to recalculate VAT recovery on office refurbishments and other smaller-scale fixed asset additions.

VAT incurred on most expenditure is recoverable by reference to how the cost is used in that particular year. The VAT will be fully recoverable, non-recoverable, or partly recoverable depending on whether it is used for taxable activities, exempt and / or non-business activities, or for a mixture of taxable and non-taxable activities, respectively.

However, for certain items of capital expenditure – computer equipment, yachts, aircraft and property – there is a requirement to look at this over a five or (for most property expenditure) ten-year period.

This can lead to substantial payments or repayments if the use of this expenditure changes. For instance, since the change to the treatment of private school fees from exempt to taxable, many schools have been able to reclaim VAT on some building projects in the previous decade. By contrast, a business that had recovered VAT on a building and then sold this without opting to tax to a developer would have to repay some of the VAT it had incurred.

However, it has also led to many organisations having to prepare complex calculations each year to reflect a very small change in the use of a property. Many housing associations and charities that refurbished their head offices have had to prepare calculations to reflect that they had maybe 7% VAT recovery on their overheads one year and then 8% the next. This has been particularly the case because the threshold for having to do these calculations has not altered for over 35 years.

From 29 July 2026 there will be two changes made to the rules.

1. Computer equipment will be removed from the scope of this legislation entirely, reflecting that it is very rare these days for a single item of computer equipment to cost more than £50,000 plus VAT.
2. The threshold for expenditure on land, buildings and civil engineering works will increase from £250,000 plus VAT to £600,000 plus VAT. This should remove expenditure such as a small office refurbishment from the need to make calculations.

HM Revenue & Customs’ brief makes it clear that the new threshold (and the removal of computers entirely) only applies where there has been no capital expenditure incurred before 29 July 2026.

• There will be no changes required to any capital goods scheme calculations that are already being made. Assets purchased prior to 29 July will continue to be adjusted for the remainder of the intervals; period (e.g. a school will continue to undertake adjustment on assets acquired that were subject to the ‘old’ £250,000 limit).
• If you are part way through incurring relevant expenditure, but the works will not be completed by 29 July, the expenditure will fall under the old rules. Therefore, if you are part-way through an office refurbishment costing more than £250,000 (net), but less than £600,000, you will still have to calculate adjustments.

• Any business or organisation that generates both taxable, and exempt and/or non-business income.
• Any business or organisation that changes their use of their property in the first ten years following incurring the capital expenditure.
• Anyone selling or acquiring a business that includes some property assets – some of the anti-avoidance rules for transfers of a going concern (TOGC) reference the Capital Goods Scheme, and so the increase in the threshold may reduce the number of transactions where these rules need to be considered.
• Anyone selling or acquiring a property that has been subject to the option to tax – again, the anti-avoidance rules apply to items within the Capital Goods Scheme and so for some smaller transactions there should be no need to be concerned with accidentally triggering these.

To discuss this further, please speak to your usual Crowe contact.